Money, Banking, and

1
Roger LeRoy Miller Economics Today 14th Edition
Chapter 15 Money, Banking, and Central
Banking Pages 365 374 381 - 384
2
Learning Objectives

• Define the fundamental functions of money.
• Identify key properties that any goods that
  function as money must possess.
• Explain official definitions of the quantity of
  money in circulation.

3
Learning Objectives

• Understand why financial intermediaries such as
  banks exist.
• Describe the basic structure of the Federal
  Reserve System.
• Discuss the major functions of the Federal
  Reserve.

4
Key Terms

• Barter
• Liquidity
• Certificates of Deposit
• Transactions accounts
• Travelers Checks
• Federal Reserve Bank
• Fiduciary Monetary System

5
Money

• Any medium that people generally
  _________________ for goods services.
• Liquidity
• The ________ to which ______________
  ______________________ without much danger of any
  intervening loss in nominal value with
  _____________________ .
• Money is the most liquid asset.

6
Degree of Liquidity
7
Types of Money
Iron Boar tusk Playing cards Copper Red
woodpecker scalps Leather Brass Feathers Gold Wine
Glass Silver Corn Polished beads
(wampum) Knives Salt Rum Pots Horses Molasses Boat
s Sheep Tobacco Pitch Goats Agricultural
implements Rice Tortoise shells Round stones with
centers removed Cows Porpoise teeth Crystal salt
bars Paper Whale teeth Snail shells Cigarettes
Source Roger Leroy Miller and David D. Van
House, MONEY, BANKING, AND FINANCIAL MARKETS,
2nd ed.
8
Four Functions of Money

• Medium of exchange
• Unit of accounting
• Store of value (purchasing power)
• Standard of deferred payment

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The Functions of Money

• Barter
• The direct exchange of goods and services for
  ______________________ without the use of money.
• Money reduces transactions costs.
• Medium of Exchange

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The Functions of Money

• Unit of Accounting
• Store of Value
• Money allows you to transfer value (wealth) into
  the future.
• Standard of Deferred Payment
• A property of an asset that makes it desirable
  for use as a means of _______________________
  maturing in the future.

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What is the Cost of Holding Money?
12
What Backs Money?

• Fiduciary Monetary System
• A system in which currency is issued by the
  government its value rests on the
  ____________________ that it can be exchanged for
  goods services.

13
Transactions Approach to Measuring Money M1

• Currency
• Minted coins paper currency ________________
  __________________________________.
• Checkable Deposits
• Any deposits in a financial institution on which
  a ______________________________.
• Non-Bank Travelers Checks
• Financial instruments purchased from a nonbanking
  organization signed during purchase that can be
  used as cash upon _________________________ by
  the purchaser.

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Composition of the U.S. M1 Money Supply, 2000
Source Federal Reserve Bulletin, Economic
Indicators, various issues
Figure 14-2, Panel (a)
15
Defining Money

• Are credit cards money?
• Are debit cards money?

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Liquidity Approach to Measuring Money M2

• M1 Savings deposits
• Small time deposits (less than 100,000)
• Money market mutual funds

17
M2 Money Supply

• Savings Deposits
• _______________________ that can be withdrawn at
  any time without payment of a penalty.
• Small Time Deposit
• A deposit in a financial institution that must be
  left for an agreed period.
• _______________ may result in a penalty.
• Certificates of Deposit.
• Money Market Mutual Funds
• Funds of investment companies that obtain funds
  from the public that are held in common used to
  acquire short-maturing credit instruments.

18
Composition of the U.S. M2 Money Supply, 2000
Source Federal Reserve Bulletin, Economic
Indicators, various issues
Figure 14-2, Panel (b)
19
Banking Structures Throughout the World

• Central banks their roles
• Perform ______________ for their nations
  government.
• Provide ________________ for private banks.
• Conduct their nations _______________.
• Established in 1913 by the Federal Reserve Act,
  the Federal Reserve System is the _______________
  of the United States.

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Organization of theFederal Reserve System
Source Board of Governors of the Federal Reserve
System, The Federal Reserve System Purposes and
Functions, 7th ed. (Washington, D.C., 1984), p.5.
Figure 14-6
21
Seven Board of Governors

• Appointed by the ___________ with _________
  confirmation.
• __________ staggered permanent terms.
• Chair chosen by the ___________ to a __________
  permanent term.

22
The Federal Reserve System
Figure 14-7
23
Federal Open Market Committee

• Composed of
• The _________ Board of Governors.
• The president of the _______________
  ________________ Bank.
• The president of _____ of the remaining district
  banks, chosen on a ___________.
• Determines ________________.
• http//www.federalreserve.gov/FOMC/

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Functions of the Fed

• Supplies the economy with ________________________
  _.
• Provides a clearing mechanism for _________.

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How a Check Clears
Figure 14-8
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Functions of the Fed Continued

• Holds depository institutions ____________.
• Acts as the governments ______________.
• ____________ member banks.
• Acts as the _____________________.
• Regulates the _______________.
• Intervenes in _________________ markets.
• http//woodrow.mpls.frb.fed.us/info/sys/index.html
  

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Summary Discussion of Learning Objectives

• The key functions of money
• Medium of exchange
• Unit of accounting
• Store of Value
• Standard of deferred payment
• Properties of goods that serve as money
• Acceptability
• Predictable value

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Summary Discussion of Learning Objectives

• Official definitions of the money supply
• M1
• M2
• The basic structure of the Federal Reserve System
• 12 district banks with 25 branches
• Governed by Board of Governors
• Federal Open Market Committee

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Summary Discussion of Learning Objectives

• Major functions of the Federal Reserve
• Supply the economy with currency
• Check collection and clearing system
• Holding depository institutions reserves
• Fiscal agent for the government supervision of
  banks
• Lender of last resort
• Regulating the money supply
• Intervening in foreign exchange markets

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End of Chapter
Chapter 14 Money, Banking, and Central Banking